Ominous outlook: Hungary could be the biggest loser in the tariff war
On Friday, the tariff war took a new turn when the US president threatened the EU with an additional 50% tariff, just hours before the EU's trade chief, Maroš Šefčovič, was due to meet his US counterpart, James Greer. It is hard to say what Donald Trump's aim was, especially given that he had already postponed the measures until 9 July by early Monday morning, allowing negotiations between Brussels and Washington to resume.
Both the IMF and ING expressed pessimism about the impact of Trump's tariff war on Europe. The International Monetary Fund (IMF) considers the Central, Eastern and South-Eastern Europe (CESEE) region to be the most vulnerable to growing trade tensions and geopolitical uncertainty fuelled by the US administration.
In a presentation in Slovenia last Friday, Alfred Kammer, the IMF's Director for Europe, analysed the region's growth prospects in light of the US tariff threats announced on 2 April. Meanwhile, analysts at ING examined the potential impact of Donald Trump's new 50% retaliatory measures announced on Friday.
The two studies reach the same conclusion from different perspectives: the European economy may now be vulnerable to both external shocks and internal structural weaknesses.
There is an imbalance, but not that way and not as big
ING begins its analysis by stating that, although there is some imbalance in US–EU trade, President Donald Trump's claims are exaggerated. While average tariffs between the US and the EU are similar, sectoral differences are indeed stark, they say. Take, for example, higher EU tariffs on cars (10% vs. 2.5% in the US) and food.
But the US has its own steep barriers. Light-trucks have long faced a 25% tariff rate, compared to 10% in the EU. Regarding the trade balance, the EU enjoyed a €198.2bn surplus with the US in 2024. Yet, when looking at services, the US runs a €109bn surplus (as of 2023), with notable IT service exports, led by dominant American tech companies, charges for intellectual property and financial services.
When trade in goods and services is taken into account, the US deficit is just €50 billion — only 3–5% of trade between the two countries.
ING noted that a relatively calm week came to an abrupt and disappointing close, serving as a stark reminder that we remain far from any 'beautiful trade deals' or return to normality.
At the current juncture, it doesn’t make sense to speculate on the outcome of these trade tensions. Anything is possible, from a potential agreement to further escalation.
"We maintain our long-held view that, in time, the economic toll of an escalating trade war on the US will become too severe to sustain elevated tariffs indefinitely. After a brief lull, brace yourself for the next turbulent chapter," they said in a research note.
Their analysis has been validated by the fact that, following its publication, Donald Trump has backed away from the additional 50% tariff threat announced on Friday, even going so far as to announce its suspension until 9 July.
Whatever happens, we are already paying a high price
The IMF said that after a respectable recovery last year, they downgraded growth for 2025 and 2026 across Europe. Heightened uncertainty and trade policy volatility have been the main factors. And the latest data releases from Q1 2025 are so far in line with the IMF's forecast, Kammer noted.
The downgrade for the CESEE region has been more sizeable than for advanced Europe: from over 3% in 2025 and 2026 to 2.4 and 2.7%, respectively.
"The larger impact is primarily due to a comparatively larger manufacturing sector. The growth revision would have been even larger if not for the German infrastructure package and an acceleration of Europe wide-defense spending," said Kammer.
It is important to note that the IMF's presentation did not take into account Trump's latest threat of extra tariffs.
However, ING has already factored these into its analysis, warning that if the US were to impose punitive tariffs of 50% on EU products,
if fully implemented, 50% US tariffs on European products would shave off some 0.6ppt of GDP growth and bring the eurozone economy close to recession territory.
ING does not specifically mention Hungary, but according to the IMF the country is particularly exposed to global risks. Kammer noted that "exposures are especially large in the Slovak Republic and Hungary. Exports to the US (primarily cars, car parts, batteries, and in the case of Hungary electronics) account for about 3% of GDP in 2024."
He added that Czechia and Hungary have also large export positions to the US via smartphones and computers exports. For the time being, tariffs on these items have been exempted per the announcement made on 11 April. "Any increase in tariffs would have substantial dampening effects on growth," Kammer said.
ING also pointed out that heightened trade tensions is having a particularly large impact on the automotive sector, and related stock indices. The Euro Stoxx 50 index was off close to 3% at the time of writing, with the auto sector off 4-5%. Meanwhile, Hungarian and Slovak companies are among the most integrated in the European automotive value chains.
According to the IMF, inflation in CESEE countries is coming down relatively fast, but the rates will remain above central bank targets for some time. "Persistent services inflation and lagged effects of still high wage growth are key drivers – a point I will return to later as a risk to competitiveness," Kammer said.
Addressing monetary policy, the IMF warns that "central banks need to remain focused on durably reaching price stability targets."
"In several large CESEE countries—including Hungary—inflation is slowing, but is still above targets.
Central banks should ease cautiously. We advise caution because core inflation in the CESEE region remains higher than hoped for, and inflation expectations are more responsive to current inflation levels,
Kammer said.
He also warned that still high wage growth requires close attention. "Increases have outpaced productivity and are contributing to higher inflation persistency. High labor costs also pose a risk to CESEE’s competitiveness," he said.
Meanwhile, according to ING, the market is already anticipating further rate cuts by the ECB, partly due to risks associated with tariff policy. Reactions in the money markets are quickly showing how sensitive the market is to trade shocks — both the EUR/USD and the EUR/GBP exchange rates moved significantly on news of the tariff threat late on Friday afternoon.
Kammer warned that, when it comes to managing external risks, the fiscal space of many CESEE countries is limited. This means they will have to undertake smart adjustments:
- make public services more efficient and programs better targeted;
- reallocate spending priorities away from low priority areas,
- and boost fiscal revenues.
In many cases, this can be done without raising tax rates by closing loopholes and more efficient administration, he noted.
The challenge is how to manage rising long-term spending pressures from aging, healthcare, climate, and now higher defense spending.
In the long term, this can only be offset by structural reforms. The same is true of Hungarian public finances, particularly given the uncertain availability of EU funds.
The trade war is not confined to just two parties
Kammer noted that indirect effects via supply chains will also become important tailwinds. In a 2024 IMF study, they show that an increase in EV imports from China could have significant GDP effects in the range of 1.0-1.5% over five years via the supply chains in CESEE countries heavily reliant on the automotive sector. The economist stressed that
a slowdown in Germany’s automotive sector has about a 5-10 times larger impact in percent of GDP in Slovakia and Hungary given their larger share of the sector relative to Germany.
In parallel with this, ING warns that:
Tariffs could generate new competition in both the EU-US relationship and third markets, potentially causing CESEE countries to lose market share to the US and China.
Focus should rather be on internal reforms
The strategic differences between the EU and the US in terms of response are also worth noting. The IMF believes that the CESEE region, including Hungary, should adopt a three-pillar strategy.
- Maintain trade openness as much as possible. Protectionism will hurt inward investment, lower investment further and bring down productivity and income growth.
- Stay the course on sound macroeconomic policies. In times of uncertainty, markets will scrutinize fundamentals. Durable policies can limit increases in risk premia. This means that central banks should remain cautious on monetary normalization and governments need to keep an eye on fiscal sustainability.
- Generate growth through traditional means: domestic structural reforms. The size of untapped gains from domestic structural reforms is surprisingly large.
Kammer noted that domestic structural reforms, while often overlooked, provide a large untapped source of European growth potential.
In a forthcoming study, we find that comprehensive national reforms could raise real GDP levels by about 5% in advanced economies and between 6.6 and 9.3% in the CESEE region.
These are sizeable gains and could be an important growth antidote to the poisonous effects of uncertainty and volatile policy disputes, he added.
These reforms would remove inefficiencies at home and complement the earlier discussed EU-wide reforms. Specifically:
- Domestic labour market and skill-upgrading reforms top the priority list in terms of their macroeconomic
- Fiscal-structural reforms and lower cost of business regulations would provide another substantial impetus.
- Reducing corruption and inefficiencies through governance reforms is particularly important in several CESEE countries.
An earlier IMF report highlighted issues including limited labour mobility, discrepancies in national regulations, challenges in recognising professional qualifications, and variations in packaging and product standards.
According to the IMF, these barriers particularly affect small and medium-sized enterprises, who find it difficult to access markets in other Member States. The document estimated that reducing these barriers could lead to significant productivity gains. For example, reducing barriers in the services sector by 10% could increase EU gross value added by 0.8%.
The IMF's proposals include developing cross-border infrastructure, liberalising protected sectors such as energy and telecommunications, standardising regulations, and encouraging the movement of capital.
For many CESEE countries, including Hungary, increasing government efficiency and reducing corruption is particularly critical. Such reforms would improve domestic efficiency and complement EU-level measures, thereby strengthening the region's resilience and growth prospects.
Negotiations or retaliation?
According to ING, the EU is pursuing a two-pronged strategy:
- while it is open to compromise,
- it has also prepared a €95 billion response package that would come into effect on 14 July should negotiations were to fail.
Finally, the IMF states that the EU budget, particularly the next Multiannual Financial Framework (MFF) for the period 2028–2034, could play a pivotal role in prompting member states to implement reforms. They recommend that aid should be distributed according to performance-based criteria, meaning the European Commission should demand reforms in exchange for a significant proportion of payments.
This logic may be particularly relevant in the case of Hungary, where the government's decision-making processes, including their discriminatory nature and effectiveness, as well as their transparency, are often criticised. ING believes that these challenges can no longer be addressed in isolation in the shadow of external shocks.
Cover photo: Sean Gallup/Getty Images
